| Spring has sprung, and Wellington has delivered a typical start to the new season - a little bit of "everything weather". A cold snap, wind bursts, a dump of snow on the Tararuas, and the odd glorious day thrown in for good measure. You just never know what you'll get next - a bit like the markets at the moment...
All the talk over the past month (in financial markets anyway) has been about the Reserve Bank of New Zealand possibly taking the Official Cash Rate (OCR) into negative territory. If you had asked me a year ago what the odds were on the OCR in New Zealand going negative, I would've thought virtually impossible - I'd have bet the house on that. And yet, here we are with markets pricing in a reasonable chance of this happening. In fact, many banking and investment IT systems had to be hastily updated because they did not have the capability to account for a negative interest rate. When these systems were originally designed, it didn't even occur to the designers to consider negative interest rates. Why would they have? There are mixed views on negative interest rates. Personally, I don't like them and think it's a dangerous experiment which is unnecessary. The Reserve Bank of Australia and the US Federal Reserve have both ruled out using negative interest rates, but if the OCR were to go negative in New Zealand, we would not be the only country in the world in this territory. The Bank of Japan, Swedish Riksbank and European Central Bank have all been using negative interest rates for some time now. Sweden have been using them for the longest (nearly 5 years), and have recently abandoned them as a result of their view now being that the adverse side effects outweigh the positive impacts. It's a good sugar hit for a short while, but the risk of developing diabetes over time increases... In my 20 years of observing investment markets, this is as unusual, exciting and challenging a time as I can ever recall. Floating in and out of lock down levels, some businesses (I.T., pharmaceuticals, etc.) thriving while others (restaurants, airlines etc.) cling on for dear life, term deposit rates anaemic, global politics in a frenzy, the rate of innovation at warp speed. It's an extraordinary point in time which, like all others, will no doubt come to pass. From an investment / financial planning perspective, the question is what to do right now. It's so very complex out there with so many fast moving parts - you really don't want to get it wrong. I don't know why, but my natural instinct when things get frenetic is to slow down. Step back, take a breath, simplify. Try block out all the noise, stick to the basics and what you know, and focus on the things that are important to you and that you can control. Carl Richards is great resource for helping me do this. Carl does "Napkin Financial Plans" - some of which I've shared with you in the past. Here's a good one to consider right now: 
Seems really simple, right? But yet it's the biggest financial mistake I come across all the time. The relevance of this right now is that for investors, you need to be realistic about the income part of the equation. Make sure that you haven't over-estimated your expected returns, and be prepared to potentially use up your capital in your lifetime.
In terms of expenses, I fear most for those people with big mortgages. Interest rates will not be as low as they are forever. At some point, the cost to service a mortgage is going to be a lot higher again. Now is not a good time to borrow money - now is a good time to aggressively reduce your debt. Here's a quick test for you - can you service your current debt levels at a 5% mortgage rate? You might just have to at some point... Here's another really important one to remember right now: 
Don't be tempted to change your investment strategy based on past results. Investment markets have delivered some extraordinary returns in the past 12 months - both good and bad. The divergence in outcomes between different funds and strategies has been marked, and it's easy to fall to the temptation of trying to "get a slice of the pie" by taking on more risk. But now is a time for discipline. If your personal circumstances, goals and risk tolerance haven't changed materially, then neither should your investment strategy. In terms of the markets over the past month, share markets around the world have been mixed. The London and Australian stock exchanges fared the worst, and New Zealand the best. The Pound Sterling weakened against the NZ$ by over 3% in the past month, but other currencies had modest moves. After a month of house prices falling, they increased in value again by $1,100 over the past month. Here are the numbers: |
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In terms of your Select Wealth Management portfolio, we met with researchers JMI Wealth recently. There were some changes recommended for portfolios. The general theme was to position portfolios for interest rates that are likely to move lower in the next 12 months. We have also lost patience with fund manager RIT Capital, and as such will start phasing them out of portfolios. Suitable replacement managers are Apostle Dundas Global Equity, Scottish Mortgage Trust, Nikko AM Global Shares Fund and Clarity New Perspectives Fund. As always, the objective is to extract the best return possible without changing the level of risk. Finally, a quick update on our Giving Back program. After a couple of busy months, I am pleased to confirm that the fund is now up to $1,500 with a bit in the pipeline too, so we should comfortably reach our target of $2,500 by the end of the year for Birthright Kapiti. Thank you for your continued support and the referrals of your friends, family and colleagues - they are greatly appreciated. You can follow progress of the campaign at https://mifinancialplanning.co.nz/giving-back.html Until next time, keep safe. Warm regards Dave and the team at Isaacs Financial Planning dave@mifinancialplanning.co.nz |
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This newsletter is intended for general distribution and does not constitute personal financial advice. Copy of my primary disclosure statement and secondary disclosure statement.